Annuity Exchange - Potential Consequences

Your consideration of the consequences of exchanging an annuity should take into account the following questions:

1. What is the total cost to me of this exchange? Although income taxes continue to be deferred, there are some other costs to consider before making the switch. For example, will the annual fees or other charges assessed by the new life insurance company offset the higher interest or bonus payments? Does the surrender charge justify the added benefits? What are the comparative costs associated with the guaranteed benefits and investment options?

2. How do the surrender provisions compare? One of the biggest transactional costs that often comes into play for any annuity exchange is the surrender charge. For many companies, surrender charges eventually expire with an existing contract after a certain period of time. However, a new contract could increase these charges and could even increase the period of time in which the surrender charges apply.

3. What are the new features being offered and why do I need or want those features? For example, you might realize the life insurance guarantee or long-term care benefit rider is not really needed if other resources already exist. Of course, just the opposite could hold true if you need the coverage and cannot find a life or long-term care insurer to take you because of health reasons. You should also consider whether there are any limitations that apply to the features? For example, if there is a guaranteed interest rate, how long does it last? Although the current interest rate for one company might be better, it's also important to consider past payment history. Also, what are the relevant expenses? Do they justify the benefits?

Keep in mind that a 1035 exchange does not provide a permanent income tax exclusion for gains on such exchanges, but merely a deferral - since the basis of the contract given up is carried over as the basis of the new contract received.

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Exchanging an Annuity

Before making the decision to exchange your annuity, there are several things you must consider:

1. How safe is my annuity investment? For an annuity product, the safety of your money is backed by the claims-paying ability of the issuing insurance company, not any government agency. So you need to make sure that the issuing company is in sound financial health. Annuity owners will sometimes exchange to a company with greater financial stability.

2. How does the current interest rate compare to the original contract rate? Some fixed annuity products offer competitive initial rates to attract investors. However, the interest rate might only be guaranteed for a limited period of time, say one or two years. With this in mind, your current renewal could be lower than what you might otherwise get on a new annuity.

3. Is my annuity lacking some of the newer annuity benefits? In a highly competitive business, many annuity companies work to offer new insurance features, such as interest rate guarantees, bonuses, guaranteed death benefits, long-term care riders and guaranteed income payments to attract investors. Therefore, you could fine that a new annuity may better meet your needs or provide you with the opportunity for competitive returns.

Whether or not an annuity exchange makes sense depends on your existing policy and your individual financial situation. Although the thought of switching annuities might, at first, appear to be in your best interests, you should always consider the costs that will often be involved in doing this.

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How Options Can Affect Your Annuity Income

 The list below is based on an initial investment of $100,000 in a single straight life annuity. It shows how your income may drop as you add extra options:

Type of Annuity - Straight Life
What it's Designed to do - Provides you with income for life.
Sample Monthly Annuity Income - $650


Type of Annuity - Life plus five-year guarantee
What it's Designed to do - Provides you with income for life. Guarantees 60 payments to your estate in case you die within the first five years of your contract.
Sample Monthly Annuity Income -  $640


Type of Annuity - Life plus 10-year guarantee
What it's Designed to do - Provides you with income for life. Guarantees 120 payments to your estate in case you die within the first 10 years of your contract.
Sample Monthly Annuity Income -  $620


Type of Annuity - Life plus joint-and-last-survivor
What it's Designed to do - Provides income for life for you and your spouse. Payments stop when both of you have died.
Sample Monthly Annuity Income - $500 


Type of Annuity - Indexed Life Annuity
What it's Designed to do - Provides income for life. Payments increase with inflation to maintain your buying power.
Sample Monthly Annuity Income -  $400 to start (goes up when prices rise)

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Type of Annuity -
What it's Designed to do -
Sample Monthly Annuity Income - 

Fixed Immediate Annuities

It's possible to increase your monthly cash flow with a fixed immediate annuity. An immediate annuity is simple the payment of a premium to an insurance company. In exchange, the company converts your premium to a monthly cash payment for life or term of years. (Monthly payments are based on the claims-paying ability of the insurer, so picking a financially solid insurance company is important.) As each payment consists of principal and interest, each annuity payment is partially excluded from taxation as described by IRS Publication 590. Premium taxes could apply in some states.

Here's a hypothetical example. A 70-year old gentleman paid $250,000 in premium to an insurance company for a fixed, immediate annuity. In return, the insurance company makes annuity payments of $2,000 per month. Of this payment $1,300 will be considered a return on investment and only $700 will be subject to federal income taxes. Assuming this taxpayer is in a 25% federal income tax bracket, the income tax for each payment would come to $175 per month. Any payments received after the taxpayer exceeds his life expectancy are complete subject to federal income taxes. That's $24,000 each year of checks in the mail. Please note that these annuities cannot be surrendered for value and payments will usually cease at the insured's death. Please note that your actual results will vary based in part upon your age and premium paid.

For whom may a fixed annuity income be suitable?

- A retiree needing increased monthly cash flow
- A person with no heirs or who is not concerned about leaving an estate
- Someone who has set aside other funds to leave to heirs if they desire to leave an inheritance
- A retiree desiring the fixed payment and wanting to avoid maturities, rolling over investments and the maintenance and administration often required of investing on one's own.

For more information contact us at Annuity Liberty.

Seven Things That Can Affect Your Annuity Income

Many people choose the peace of mind that an annuity offers because it gives them set monthly payments in return for their savings. Of course, you want to receive the most income you possibly can for those savings. Here are some things that can have an affect on your income:

1. Your Age: The older you are, the more money you get. That's because you are not expected to live as long.

2. Your Health: If you have health problems, you are less likely to live as long as a healthy person so you will get a higher income.

3. Your Gender: Women get less money than men of the same age because they are likely to live longer.

4. Type of Annuity: You get the highest income with a basic annuity that covers only you. Any special options you add will lower your income. That's because these options increase the costs to the insurance company. Example: You'll get less if you want to protect your income from rising prices.

5. Interest Rates: If interest rates are high when you buy your annuity, you'll get bigger payments. Some people wait to buy an annuity until they can get more for their money.

6. How Much You Have Saved: The more money you put into your annuity, the more you get back as income.

7. How Long You Want the Annuity to Last: With some annuities, you only get monthly payments until your death. With others, payments may continue to your spouse, your dependent children, or your estate after you die. The longer you want payments to carry on after your death, the less you'll get each month while you're alive.

Remember, there are ways to make your annuity do more for you. Contact us to learn more!

Things To Consider...

There are many factors that should be considered before investing in an annuity. Some of these include:

1. Surrender Fees: Like fixed deferred annuities, equity-indexed annuities have penalties for early withdrawal called surrender charges. These charges can result in a loss of your principal investment. These charges typically decline over the length of the surrender charge period (typically five to 15 years depending on the company)

2. Tax Consequences: These annuities are also suited for investors with long-term investment horizons. Withdrawals from these annuities can also subject the annuity owner to income taxes, and prior to age 59 1/2, an additional 10% income tax penalty on the distributed amount.

3. Features Vary Among Insurance Companies: There are many companies that are offering these types of annuities, and the methods of calculating the minimum and maximum interest rate vary greatly among them. Although many companies offer a minimum interest rate (typically ranging between 1/5 to 3%), some companies offer minimum interest rates as low oas 0%.

4. Fees and Expenses: Asset management fees will be incurred on these annuities. Maintenance feels, sales commissions, trading costs and other contract charges could also apply. These charges will, in many cases reduce the account value of these annuities.

5. Loans and Early Withdrawals: Although some companies do allow you to ake minimal withdrawals with surrender charges, it is important to remember that some withdrawals can affect the amount of market downside protection provided under the contract.

6. Company Stability and Regulatory Oversight: All annuity features are guaranteed by the claims-paying ability of the issuing company. The guaranteed account value of an equity-index annuity applies only if the annuity is held until the end of the contract term, and that loss of principal is possible if the annuity is surrendered before the end of the contract. Despite the market participation feature, the various state insurance departments regulate these products.

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What Choices do I Have When I Buy an Annuity?

Many people who buy life annuities add one or more of these three options:

1. Joint-and-last-survivor option
   This option appeals to couples. Payments continue as long as either you or your partner lives. Sometimes you can get higher monthly payments while both partners are alive. After one dies, the payments to the surviving partner go down. The thinking is that one person will need less income than two.
2. Guaranteed benefit
   This option guarantees a certain number of payments. For instance, let’s say you choose a 10-year guarantee. What happens if you die before the 10 years are up? Your loved ones or your estate will get the rest of your payments, or they may receive a lump sum of equal value. Of course, if you live past the guarantee period, you will still receive payments for life.
3. Indexed annuity
   This option means your income goes up as prices rise. This is important because after five, 10, or 15 years, your monthly income will buy a lot less than it does today.
4. Choosing the right annuity:
5. Remember: There are lots of options for annuities today.

They may lower the size of your monthly payment, but they may make an annuity work better for you overall. For more information, contact us at Annuity Liberty!